Highlights

We believe companies in the nascent Payments Sector will produce a long period of abnormal organic growth on the back of an increased adoption of electronic payments which is driven by the fact that electronic payments are cheaper than cash or cheques and BNM initiatives to drive adoption.

We believe this growth has not been fully reflected in forecasts, valuations and hence price of selected stocks as the sector is relatively under-covered and for now, off the institutional investors radar.

We see the imminent implementation and announcement of GST in the upcoming budget as a major catalyst for the realisation of value in the sector. GST will require a major reworking of the payments infrastructure, benefiting certain companies and increasing the awareness of all, as the market fishes through the sector in search of alpha.

M&A is an additional catalyst for stock price as domestic firms go on the acquisition path to increase economies of scale and international firms with low borrowing costs hunt for emerging market growth.

Our Top pick is Censof because of organic growth related to Government departments shifting towards electronic payments, potential work related to the implementation of GST and value accretion from the acquisition of Time Engineering.

Our favourite company in the B2C segment of the Payments Sector is GHL Systems for its dominate market share, regional foot print and strong management team. We caution a potential share overhang from the conversion of E Pay shares. Note, assuming the E Pay acquisition goes through, at current prices, E Pay is a cheaper proxy.

Catalysts

Upgrades: GST and M&A.

Downgrades: Global recession and a decrease in consumer confidence, execution failure.

Risks

Global recession.

Rating

OVERWEIGHT

Positives: We believe that organic growth as payments move to electronic will drive earnings in the sector.

Negatives: execution risk, delay in GST.

Valuation

Top picks in order of preference;

Censof (Not Rated - TP: 0.65 or 15x FY14 EPS of 4.3 sen/share)

GHLS (Not Rated - TP: RM1.00 or 15x FY14 EPS of 6.7 sen/share).

Source: Hong Leong Investment Bank Research - 21 Oct 2013